Salary vs. Dividends for Shareholders: What’s Best for You?

When running a corporation, one major decision shareholders face is how to pay themselves: salary or dividends. Both options have pros and cons, and the right choice depends on your specific financial situation.

A salary is paid as regular income, just like wages to any employee. The main advantage of taking a salary is that it allows you to contribute to the Canada Pension Plan (CPP), which can help increase retirement benefits later. Additionally, salary counts as earned income, which means it helps you qualify for RRSP (Registered Retirement Savings Plan) contributions, allowing for tax-deferred growth of your retirement savings. Salaries are also considered a business expense, reducing your company’s taxable income.

On the other hand, dividends are payments made to shareholders from a company’s profits. Dividends are taxed at a lower rate than salary due to the Dividend Tax Credit, which makes them attractive for tax savings. However, unlike salary, dividends don’t allow for CPP contributions, nor do they count as earned income for RRSP purposes. Additionally, dividends aren’t considered a business expense, so they don’t reduce the company’s taxable income.

To help you compare:

• Salary contributes to CPP and RRSP.

• Dividends are taxed at a lower rate.

• Salary reduces company taxable income.

• Dividends don’t provide retirement plan contributions.

  
  

Choosing between salary and dividends depends on your income, tax bracket, and retirement goals. Each has distinct advantages, and a blend of both can sometimes be the best approach.

With the recent changes in tax brackets for Canadian individuals and corporations, it's crucial to reassess the most beneficial methods for drawing corporation income for shareholders. Based on the 2024 tax rates in Manitoba, it appears more advantageous, in general, for shareholders to pay themselves as T4 employees compared to other alternatives. It is important to acknowledge that there are various factors may influence this recommendation.

K Liu Accounting Services Inc. offers professional consultation services to help business owners make informed decisions tailored to their specific circumstances. Whether you are considering options for provinces other than Manitoba or would like a comparative analysis based on your corporation and income level, we provide paid consultations to guide you. Reach out to K Liu Accounting Services Inc. for more information on how we can assist your business.

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